The managing director of Parser Ltd, a small business, is considering undertaking a one-off contract and has asked her inexperienced accountant to advise on what costs are likely to be incurred so that she can price at a profit. The following schedule has been prepared:

Costs per special order: Notes

Direct wages 1 28,500

Supervisor costs 2 11,500

General overheads 3 4,000

Machine depreciation 4 2,300

Machine overheads 5 18,000

Materials 6 34,000

98,300

Notes

1 Direct wages comprise the wages of two employees, particularly skilled in the labour process for this job, who could be transferred from another department to undertake work on the special order. They are fully occupied in their usual department and subcontracting staff would have to be brought in to undertake the work left behind. Subcontracting costs would be 32,000 for the period of the work. Different subcontractors who are skilled in the special order techniques are available to work on the special order and their costs would amount to 31,300.

2 A supervisor would have to work on the special order. The cost of 11,500 is comprised of 8,000 normal payments plus 3,500 additional bonus for working on the special order. Normal payments refer to the fixed salary of the supervisor. In addition, the supervisor would lose incentive payments in his normal work amounting to 2,500. It is not anticipated that any replacement costs relating to the supervisor's work on other jobs would arise.

3 General overheads comprise an apportionment of 3,000 plus of 1,000 incremental overheads.

4 Machine depreciation represents the normal period cost based on the of tile contract It is anticipated that 500 will be incurred in additional machine maintenance costs.

5 Machine overheads (for running costs such as electricity) are charged at 3 per hour. It is estimated that 6,000 hours will be needed for the special order. The machine has 4,000 hours available capacity. The further 2,000 hours required will mean an existing job is taken off the machine resulting in a lost contribution of 2 per hour.

6 Materials represent the purchase cost of 7,500 kg bought some time ago. The materials are no longer used and are unlikely to be wanted in the future except on, the special order. The complete stock of materials (amounting to 10,000 kg), or part thereof, could be sold for 4.20 per kg. The replacement cost of material used would be 33,375.

Because the business does not have adequate funds to finance the special order, a bank overdraft amounting to 20,000 would be required for the project duration of three months. The overdraft would be repaid at the end of the period. The company uses a cost of capital of 20% to appraise projects. The bank's overdraft rate is 18%.

The managing director has heard that, for special orders such as this, relevant costing should be used that also incorporate opportunity costs. She has approached you to create a revised costing schedule based on relevant costing principles.

Required:

Write a report to Parser Ltd concerning whether or not to undertake the one-off offer. You should consider to adjust, the schedule prepared by the accountant to a relevant cost basis, justifying your answer wherever applicable, incorporating appropriate opportunity cost.